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Income Ratios
- Gross Profit Margin
- Turnover of Total Operating Assets
- Net Sales to Tangible Net Worth
- Operating Income to Net Sales Ratio or Profit from Operations
- Acceptance Index
Profitability Ratios
- Net Profit on Net Sales
- Net Profit to Tangible Net Worth
- Net Operating Profit Rate of Return
- Management Rate of Return
- Earning Power
- Dividend Yield on Common Stock
- Dividend Payout Ratio
- Return on Assets
- Return on Investment
- Return on Equity
- Du Pont Return on Assets
Liquidity Ratios
- Current Ratio
- Quick Ratio (Acid Test Ratio)
- Absolute Liquidity Ratio
- Basic Defense Interval
- Receivables Turnover
- Average Collection Period
- Inventory Turnover
- Days of Inventory
- Inventory to Net Working Capital
Working Capital Ratios
- Working Capital Ratio
- Working Capital Turnover
- Current Debt to Net Worth
- Funded Debt to Net Working Capital
Bankruptcy Ratios
- Working Capital to Total Assets
- Retained Earnings to Total Assets
- EBIT to Total Assets
- Sales to Total Assets
- Equity to Debt
- Cash Flow to Debt
- Strategic Cash Flow
- Free Cash Flow
Long-Term Analysis
- Current Assets to Total Debt
- Stockholders' Equity Ratio
- Total Debt to Net Worth
- Index of Sustainable Growth
Coverage Ratio
- Times Interest Earned
- Total Coverage Ratios
Leverage Ratios
- Equity Ratio
- Debt to Equity Ratio
- Total Debt to Tangible Net Worth
Efficiency Ratios
- Inventory Turnover
- Days of Inventory
- Net Working Capital Turnover
- Asset Utilization
- Fixed Asset Turnover
- Accounts Receivable Turnover
- Accounts Payable Period
- Days of Cash
- Productivity
- Receivables Turnover
- Average Collection Period
- Debt to Asset Ratio
- Long-term Debt to Capital Structure
- Times Interest Earned
- Coverage of Fixed Charges
- Leverage
- Operating Cycle
Activity ratios help assess the efficiency of managers' actions
Margin available to cover other expenses beyond cost of goods sold.
Gross Profit Margin = (Sales - cost of goods sold) / net sales
Net Sales / Total Operating Assets* = Turnover of Total Operating Assets Ratio
*Total operating assets = total assets - (long-term investments + intangible assets)
Net Sales / Tangible Net Worth* = Net Sales to Tangible Net Worth Ratio
*Tangible Net Worth = owner's equity - intangible assets
Margin available to cover interest costs, taxes and dividends
Operating Income / Net Sales = Operating Income to Net Sales Ratio
Operating income derives from ordinary business operations and excludes other revenue (losses), extraordinary items, interest on long-term obligations, and income taxes.
Applications Accepted / Applications Submitted = Acceptance Index
This index of effectiveness does not apply to every type of business.
Closely linked with income ratios are profitability ratios, which shed light upon the overall effectiveness of management regarding the returns generated on sales and investment.
Gross Profit on Net Sales
(Net Sales - Cost of Goods Sold) / Net Sales = Gross Profit on Net Sales Ratio
EAT* / Net Sales = Net Profit on Net Sales Ratio
*EAT= earnings after taxes
Sales expenses may be substituted out of profits for other costs to generate even more sales and profits.
EAT / Tangible Net Worth = Net Profit to Tangible Net Worth Ratio
EBIT/ Tangible Net Worth = Net Operating Profit Rate of Return Ratio
Operating Income / Fixed Assets + Net Working Capital = Management Rate of Return Ratio
(Net Sales * EAT) / (Tangible Net Worth * Net Sales) = Earning Power Ratio
It refers to dividend rate of return to stockholders at the current market price.
Dividend per share / market price per share = Dividend Yield on Common Stock
It refers to percentage of profit that is paid out as dividend.
Dividends per share / earnings per share = Dividend Payout Ratio
It measures the company's ability to utilize its assets to create profits.
Net Income / [(Beginning + Ending Total Assets) / 2]
It measures the income earned on the invested capital.
Net Income / Long-term Liabilities + Equity
It measures the income earned on the shareholder's investment in the business.
Net Income / Equity
It is a combination of financial ratios in a series to evaluate investment return.
(Net Income* Sales * Assets) / (Sales * Assets * Equity)
The benefit of the method is that it provides an understanding of how the company generates its return.
Liquidity ratios measure the ability of a business to meet short term obligations.
It measures the company's ability to pay its short-term liabilities from short-term assets.
Current Assets* /Current Liabilities* = Current Ratio
*Current Assets = net of contingent liabilities on notes receivable
*Current Liabilities = all debt due within one year of statement data
Cash + Marketable Securities + Accounts Receivable (net) / Current Liabilities = Quick Ratio
Known as Acid Test, measures the company's ability to pay off its short-term obligations from current assets, excluding inventories.
Cash + Marketable Securities / Current Liabilities = Absolute Liquidity Ratio
(Cash + Receivables + Marketable Securities) / [(Operating Expenses + Interest + Income Taxes) / 365] = Basic Defense Interval
Total Credit Sales / Average Receivables Owing = Receivables Turnover Ratio
(Accounts + Notes Receivable)/ (Annual Net Credit Sales) / 365 = Average Collection Period
Cost of Goods Sold / Average Inventory = Inventory Turnover Ratio
Multiply your inventory turnover by your gross margin percentage. If the result is 100 percent or greater, your average inventory is not too high.
Number of day’s worth of inventory that a company has on hand.
Days of Inventory = Average Inventory / (cost of goods sold / statement's period)
It provides an idea of the danger of unfavorable changes in inventory to the excess of current assets over current liabilities.
Inventory to Net Working Capital = Inventory / (current assets - current liabilities)
This ratio is particularly valuable in determining your business's ability to meet current liabilities.
Net Sales / Net Working Capital = Working Capital Turnover Ratio
Current Liabilities / Tangible Net Worth = Current Debt to Net Worth Ratio
Long-Term Debt / Net Working Capital = Funded Debt to Net Working Capital Ratio
Funded debt (long-term liabilities) = all obligations due more than one year from the balance sheet date
Long-term liabilities should not exceed net working capital.
The first five bankruptcy ratios in this section can detect potential financial problems up to three years prior to bankruptcy. The sixth ratio, Cash Flow to Debt, is known as the best single predictor of failure.
Net Working Capital / Total Assets = Working Capital to Total Assets Ratio
Retained Earnings / Total Assets = Retained Earnings to Total Assets Ratio
A negative ratio portends cloudy skies. However, results can be distorted by manipulated retained earnings (earned surplus) data.
EBIT / Total Assets = EBIT to Total Assets Ratio
Total Sales / Total Assets = Sales to Total Assets Ratio
[Market Value of Common + Preferred Stock] / [Total Current + Long-Term Debt] = Equity to Debt Ratio
Cash Flow* / Total Debt = Cash Flow to Debt Ratio
*Cash flow = Net Income + Depreciation
It is the cash left once internal growth has been financed. It is the cash left to invest in strategic expansion, or to distribute dividends, or to lower the debt load.
Cash flow + cash need variation + Capital expenditure = Strategic Cash Flow
Cash flow = Net income + depreciation, depletion and amortization,
Cash need = Inventory + Receivables - Payables, the variation of which from one period to the other is computed,
Capital expenditure = Tangible and intangible investments, the variation of fixed assets from one year to the other being an acceptable approximation.
While doing leverage buyouts (or takeovers), strategists looks at this amount in planning their strategy.
Cash Flow - Capital expenditures - Dividends = Free Cash Flow
Cash Flow = Operating cash flow - interest expense - income tax expense,
Dividends = Dividends per share * number of shares.
Current Assets / [Current + Long-Term Debt] = Current Assets to Total Debt Ratio
Stockholders' Equity / Total Assets = Stockholders' Equity Ratio
(Current + Deferred Debt)/ Tangible Net Worth = Total Debt to Net Worth Ratio
Robert L. Higgins developed this index to determine the level of growth of sales beyond which external capital will be needed.
g = (X1 (1 - X2) (1 + X3)) / (X4 - (X1 (1 - X2) (1 + X3))), with
X1 = Profit Margin = (Income before Taxes / Sales) * 100
X2 = Dividend Payout Ratio = Total Dividends / Net Income
X3 = Leverage = Liabilities / Equity
X4 = (Assets / Sales) * 100
While planning for a specific growth in sales, one must be aware of whether external financing will be needed.
Coverage Ratios
EBIT/ I = Times Interest Earned Ratio
EBIT = earnings before interest and taxes
I = dollar amount of interest payable on debt
(EBIT / I) + (s/1-h) = Total Coverage Ratio
I = interest payments
s = payment on principal figured on income after taxes (1 - h)
Leverage Ratios
Common Shareholders' Equity/ Total Capital Employed = Equity Ratio
Debt + Preferred Long-Term / Common Stockholders' Equity= Debt to Equity Ratio
Current + Long-Term Debt / Total Assets = Debt Ratio
Number of times the inventory was turned over (i.e., sold) during the period.
Net Sales / Average Inventory = Inventory Turnover
Number of day’s worth of inventory that a company has on hand.
Average Inventory / (cost of goods sold / statement's period) = Days of Inventory
Net sales / net working capital (= Current Assets - Current Liabilities) = Net Working Capital Turnover
Asset Turnover, it measures the amount of sales generated by each dollar of asset.
Sales / total assets = Asset Turnover
It measures the utilization of the company's fixed assets.
Sales / Fixed assets = Fixed Asset Turnover
Number of times that accounts is cycled during the period.
Sales / Accounts Receivable = Account Receivable Turnover
It is an average length of time that it takes the company to pay its suppliers
Accounts payable / (purchases on credit/ period of accounting statements) = Accounts Payable Period
It is number of days of cash on hand at present sales level.
Cash / (sales / period of time) = Days of Cash
It is level of Sales per Employee.
Sales / Number of Employees = Productivity
Total Credit Sales / Average Receivables Owing = Receivables Turnover Ratio
(Accounts + Notes Receivable)/ (Annual Net Credit Sales) / 365 = Average Collection Period
Measures the extent to which borrowed funds have been used to finance the acquisition of assets.
Total debt / assets = Debt to Asset Ratio
It measures the long-term component of the capital structure.
Long-term liabilities / stockholders' equity = Long term debt to Capital Structure
It is also known as Coverage Ratio, it indicates the ability of the company to meet its interest costs.
Operating Profit / interest charges = Times Interest Earned
It means company's ability to meet all of its fixed commitments.
(Profit before interest and taxes + lease charges) / (interest charges + lease charges) = Coverage of Fixed Charges
It measures the extent to which assets are financed with debt.
Assets / stockholders' equity = Leverage
It shows the time between the acquisition of inventory and the realization of cash from sales of inventory.
Accounts Receivable Turnover in Days + Inventory Turnover in Day = Operating Cycle
For most companies the operating cycle is less than one year, but in some industries it is longer. |